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MarketScreener Homepage  >  Equities  >  OTC Bulletin Board  >  Applied Minerals Inc    AMNL

APPLIED MINERALS INC

(AMNL)
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APPLIED MINERALS : MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-Q)

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08/14/2019 | 05:06pm EDT

Forward-looking Statements




This Quarterly Report on Form 10-Q contains "forward-looking statements" within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. These forward-looking statements are based on
our current expectations, assumptions, estimates and projections about our
business and our industry. Words such as "believe," "anticipate," "expect,"
"intend," "plan," "will," "may," and other similar expressions identify
forward-looking statements. In addition, any statements that refer to
expectations, projections or other characterizations of future events or
circumstances are forward-looking statements. These forward-looking statements
are subject to certain risks and uncertainties that could cause actual results
to differ materially from those reflected in the forward-looking statements.



Overview



Applied Minerals, Inc. is focused primarily on (i) the development, marketing
and sale of our halloysite clay-based DRAGONITE™ line of products for use in
advanced applications such as, but not limited to, reinforcement additives for
polymer composites, flame retardant additives for polymers, catalysts,
controlled release carriers for paints and coatings, strength reinforcement
additives for cement, concrete, mortars and grouts, advanced ceramics, rheology
additives for drilling fluids, environmental remediation media, and carriers of
agricultural agents and (ii) the development, marketing and sale of our AMIRON™
line of iron oxide products for pigmentary and technical applications.
Halloysite is an aluminosilicate with a tubular structure that provides
functionality for a number of applications. Iron oxides are inorganic compounds
that are widely used as pigments in paints, coatings and colored concrete.



The Company owns the Dragon Mine, which has significant deposits of high-quality
halloysite clay and iron oxide. The 267-acre property is located in southwestern
Utah and its resource was mined for halloysite on a large-scale, commercial
basis between 1949 and 1976 for use as a petroleum cracking catalyst. The mine
was idle until 2001 when the Company leased it to initially develop its
halloysite resource for advanced, high-value applications. We purchased 100% of
the property in 2005. After further geological characterization of the mine, the
Company identified a high-purity, natural iron oxide resource that it has
commercialized to supply certain pigmentary and technical markets.



The Company has a mineral processing plant with a capacity of up to 45,000 tons
per annum for certain applications. The Company has a smaller processing
facility with a capacity of 5,000 - 10,000 tons per annum that is currently
dedicated to its halloysite resource. The Company believes it can increase its
halloysite production capacity to meet an increase in demand through (i) an
expansion of our on-site production capacity through a relatively modest capital
investment and (ii) the use of a manufacturing tolling agreement.



The Company currently sells its DRAGONITE product as functional additive for
advanced molecular sieves, as a nucleating agent for injection molding
applications and as a binder for ceramic applications. For a number of markets
mentioned above, the Company is currently working with a number of customers,
which are in the latter stages of commercializing new and existing products that
will utilize DRAGONITE as a functional additive.



Applied Minerals is a publicly traded company incorporated in the state of Delaware. The common stock trades on the OTCQB under the symbol AMNL.

Critical Accounting Policies and Estimates

A complete discussion of our critical accounting policies and estimates is
included in our Form 10-K for the year ended December 31, 2018. There have been
no material changes in our critical accounting policies and estimates during the
six-month period ended June 30, 2019 compared to the disclosures on Form 10-K
for the year ended December 31, 2018.



Leases



Effective January 1, 2019, the Company adopted ASU 2016-02, Leases (Topic 842).
Lessees are required to recognize a right-of-use asset and a lease liability for
virtually all of their leases (other than leases that meet the definition of a
short-term lease). The liability is equal to the present value of lease
payments. The asset is based on the liability, subject to certain adjustments,
such as for initial direct costs. For income statement purposes, a dual model
was retained, requiring leases to be classified as either operating or finance
leases. Operating leases result in straight-line expense (similar to operating
leases under the prior accounting standard) while finance leases result in a
front-loaded expense pattern (similar to capital leases under the prior
accounting standard). Lessor accounting is similar to the prior model, but
updated to align with certain changes to the lessee model (e.g., certain
definitions, such as initial direct costs, have been updated) and the new
revenue recognition standard that was adopted in 2018. See the Recently Adopted
Accounting Standards section of Note 3 ''Significant Accounting Policies'' to
the unaudited consolidated financial statements for a detailed discussion of the
adoption of this new lease standard.



  18





Three Months Ended June 30, 2019 Compared to Three Months Ended June 30, 2018




Results of Operations



The following sets forth, for the periods indicated, certain components of our operating earnings, including such data stated as percentage of revenues:



                                                 Three Months Ended June 30,                Variance
                                                    2019               2018              $              %

REVENUES                                       $       218,936$     92,438$    126,498          137 %

OPERATING EXPENSES:
Production costs                                       219,453          184,875           34,578           19 %
Exploration costs                                       43,829           55,132          (11,303 )        (21 )%
General and administrative                           1,118,111          875,909          242,202           28 %
Depreciation expense                                         -          321,818         (321,818 )       (100 )%
Total Operating Expenses                             1,381,393        1,437,734          (56,341 )         (4 )%
Operating Loss                                      (1,162,457 )     (1,345,296 )        182,839          (14 )%
OTHER (EXPENSE) INCOME:
Interest expense, net, including
amortization of deferred financing cost and
debt discount                                         (531,371 )       (578,904 )         47,533           (8 )%
Gain on revaluation of PIK Note derivative                   -        1,601,423       (1,601,423 )       (100 )%
Other income, net                                          953            3,738           (2,785 )        (75 )%

Total Other (Expense) Income                          (530,418 )      1,026,257       (1,556,675 )       (152 )%

NET LOSS                                       $    (1,692,875 )$   (319,039 )$ (1,373,836 )        431 %




Revenue for the three months ended June 30, 2019 totaled $218,936, an increase
of $126,498 or 137%, compared to the same period in 2018. The increase was
driven primarily by a sale of DRAGONITE totaling $192,000 to a manufacturer of
high performance molecular sieves that did not occur in the same period in 2018,
partially offset by the absence of a sale of DRAGONITE totaling $36,000 for use
as a nucleating agent to a manufacturer of plastic lawn and garden products, a
$11,300, or 39% decline in the sale of DRAGONITE to a supplier of ceramic clay
bodies, and a decline of approximately $18,000 in the sales to customers using
DRAGONITE for product development purposes.



Total operating expenses for the three months ended June 30, 2019 totaled
$1,381,393, a decrease of $56,341, or 4%, compared to the same period in 2018.
The decline was driven primarily by a $242,202, or 28%, increase in general and
administrative costs and a $321,818, or 100%, decline in depreciation expense.
The decline in depreciation expense resulted from an impairment of long-lived
assets in the fourth calendar quarter of 2018.



Production costs include those operating expenses which management believes are
directly related to the mining and processing of the Company's iron oxide and
halloysite minerals, which result in the production of its AMIRON and DRAGONITE
products for commercial sale. Production costs include, but are not limited to,
wages and benefits of employees who mine material and who work in the Company's
milling operations, energy costs associated with the operation of the Company's
two mills, the cost of mining and milling supplies and the cost of the
maintenance and repair of the Company's mining and milling equipment. Wages and
energy are the two largest components of the Company's production costs.



Production costs incurred during the three months ended June 30, 2019 were
$219,453, an increase of $34,578, or 19%, compared to the same period in 2018.
The increase was driven primarily by an increase of $12,313 in freight costs
related to the shipment of DRAGONITE to a customer in Europe, an increase of
$11,029 in mining material costs related to an increase in underground activity,
an increase of $10,245 in utilities expense related to an increase in production
activity, and an increase of $10,076 in workers' compensation expense related to
the absence of dividend payment from the Company's carrier, partially offset by
a decrease of $11,474 in healthcare insurance expense related to a reduction in
headcount at the Company's Utah operation.



Exploration costs include operating expenses incurred at the Dragon Mine that
are not directly related to production activities. Exploration costs incurred
during the three months ended June 30, 2019 were $43,829, an $11,303, or 21%,
decline compared to the same period in 2018. The decline was due to a general
reduction in non-production-related wage, healthcare and tax expenses at the
Dragon Mine.


General and administrative expenses incurred during the three months ended June
30, 2019 totaled $1,118,111, an increase of $242,202, or 28%, when compared to
the same period in 2018. The increase was due primarily to an increase in
director expense of $127,386 due primarily to a cash-based rather than
equity-based accrual of director fees, an increase of $45,815 in D&O expense, an
increase of $43,252 in equity-based compensation related primarily to an annual
grant of options to directors, an increase of $12,721 in travel and
entertainment expense related to an increase in customer visits, and an increase
of $12,624 in healthcare insurance expense related primarily to an increase
in
rates.



Operating loss incurred during the three months ended June 30, 2019 was
$1,162,457, a $182,839, or 14%, decrease when compared to the same period in
2018. The decline was driven primarily by a $242,202 increase in general and
administrative expense, offset by a $321,818 decrease in depreciation expense
and a $126,498 increase in revenue when compared to the same period in 2018.



  19






Total Other Expense was $530,418 for the three months ended June 30, 2019
compared to Total Other Income of $1,026,257. The $1,556,675 decline in Total
Other Income was due primarily to the elimination, during the current period, of
the revaluation of the PIK Note derivative liability, which resulted in a gain
of $1,601,423 during the same period in 2018.



Net Loss for the three-month period ending June 30, 2019 was $1,692,875, an
increase of $1,373,836, or 431%, when compared to the same period in 2018. The
increase was primarily driven by the absence of $1,601,423 of other income,
related to the revaluation of the PIK Note derivative liability, realized during
the three months ended June 30, 2018, partially offset by a $182,839 decline in
operating loss for the three months ended June 30, 2019.



Six Months Ended June 30, 2019 Compared to Six Months Ended June, 2018



Results of Operations


The following sets forth, for the periods indicated, certain components of our operating earnings, including such data stated as percentage of revenues:



                                                 Six Months Ended June 30,                Variance
                                                   2019             2018               $              %

REVENUES                                       $    339,463$     138,085$    201,378          146 %

OPERATING EXPENSES:
Production costs                                    445,158           356,461           88,697           25 %
Exploration costs                                    77,596           111,093          (33,497 )        (30 )%
General and administrative                        1,930,681         2,074,955         (144,274 )         (7 )%
Depreciation expense                                      -           644,962         (644,962 )       (100 )%
Total Operating Expenses                          2,453,435         3,187,471         (734,036 )        (23 )%
Operating Loss                                   (2,113,972 )      (3,049,386 )        935,414          (31 )%
OTHER (EXPENSE):
Interest expense, net, including
amortization of deferred financing cost and
debt discount                                      (923,851 )      (3,120,955 )      2,197,104          (70 )%
Loss on revaluation of PIK Note derivative                -        (6,578,504 )     (6,578,504 )       (100 )%
Other income, net                                     2,367           353,824         (351,457 )        (99 )%

Total Other Expense                                (921,484 )      (9,345,635 )      8,424,151          (90 )%

NET LOSS                                       $ (3,035,456 )$ (12,395,021 )$  9,359,565          (76 )%




Revenue for the six months ended June 30, 2019 totaled $339,463, an increase of
$201,378, or 146%, compared to the same period in 2018. The increase was driven
primarily the sale of DRAGONITE totaling $288,000 to a manufacturer of high
performance molecular sieves, partially offset primarily by the absence of a
sale of DRAGONITE totaling $36,000 for use as a nucleating agent to a
manufacturer of plastic lawn and garden products, a $12,600 decline in the sale
of DRAGONITE to a manufacturer of ceramic clay bodies, the absence of the sale
of DRAGONITE totaling $11,022, a decrease in the sale of DRAGONITE totaling
$8,916 to a distributor of specialty chemicals, the absence of the sale of
DRAGONITE totaling $6,021 to a distributor of research and development
materials, and a $4,860 decline in the sale of DRAGONITE to a manufacturer
of
flame retardant material.



Total operating expenses for the six months ended June 30, 2019 totaled
$2,453,435, a decrease of $734,036, or 23%, compared to the same period in 2018.
The decline was driven primarily by a $144,274, or 7%, decline in general and
administrative costs and a $644,962, or 100%, decline in depreciation expense.
The decline in depreciation expense resulted from an impairment of long-lived
assets in the fourth calendar quarter of 2018.



Production costs include those operating expenses which management believes are
directly related to the mining and processing of the Company's iron oxide and
halloysite minerals, which result in the production of its AMIRON and DRAGONITE
products for commercial sale. Production costs include, but are not limited to,
wages and benefits of employees who mine material and who work in the Company's
milling operations, energy costs associated with the operation of the Company's
two mills, the cost of mining and milling supplies and the cost of the
maintenance and repair of the Company's mining and milling equipment. Wages and
energy are the two largest components of the Company's production costs.



Production costs incurred during the six months ended June 30, 2019 were
$445,158, an increase of $88,697, or 25%, compared to the same period in 2018.
The increase was driven primarily by a $78,392 increase in wage-related expense
due to the incurrence of greater employee overtime during the period, an
increase in freight costs totaling $30,969 related primarily to the shipment of
DRAGONITE to a customer in Europe, and an increase in mining materials cost of
$20,807 due to an increase in underground mining activity, partially offset by a
$34,355 decrease in healthcare insurance expense related to a reduction in
headcount, a reduction in shipping and postage expense totaling $5,353 and a
$3,322 reduction in utility expense.



Exploration costs include operating expenses incurred at the Dragon Mine that
are not directly related to production activities. Exploration costs incurred
during the six months ended June 30, 2019 were $77,596, a $33,497, or 30%,
decline compared to the same period in 2018. The decline was due to a general
reduction in non-production-related expenses at the Dragon Mine.



  20






General and administrative expenses incurred during the six months ended June
30, 2019 totaled $1,930,681, a decline of $144,274, or 7%, when compared to the
same period in 2018. The decline was driven primarily by a decrease in option
expense totaling $329,577 and a decline in consulting expenses totaling $51,876,
partially offset by a $91,631 increase in D&O insurance premiums, an increase in
director expenses of $82,538 due primarily to a cash-based rather than
equity-based accrual of director fees, an increase in healthcare insurance
expense totaling $25,014 due primarily to tan increase in rates and the addition
of an employee to the policy, an increase in travel and related expense of
$22,961 and an increase in dues and subscription fees totaling $15,601.



Operating loss incurred during the six months ended June 30, 2019 was
$2,113,972, a $935,414, or 31%, decrease when compared to the same period in
2018. The decline was driven by a $144,274 decline in general and administrative
expense, a $644,962 decrease in depreciation expense and a $201,378 increase in
revenue when compared to the same period in 2018.



Total Other Expense for the six months ended June 30, 2019 was $921,484, a
decline $8,424,151, or 90%, when compared to the same period in 2018. The
decline was driven primarily to (i) the elimination, during the current period,
of the revaluation of the PIK Note derivative liability, which resulted in a
loss of $6,578,504 during the same period in 2018 and (ii) a reduction in
interest expense of $2,197,104, or 70%, when compared to the same period in 2018
due to a reduction in the interest rate resulting from a revision of the terms
of the PIK Notes.



Net Loss for the six-month period ending June 30, 2019 was $3,035,456, a decline
of $9,359,565, or 76%, when compared to the same period in 2018. The decline was
driven by an $8,424,151 decrease in Total Other Expense and a $935,414 decline
in operating loss.


LIQUIDITY AND CAPITAL RESOURCES




The Company has a history of recurring losses from operations and the use of
cash in operating activities. For the six months ended June 30, 2019, the
Company's net loss was $3,035,456 and cash used in operating activities was
$1,571,006. As of June 30, 2019, the Company had current assets of $953,654 and
current liabilities of $1,396,464 of which $302,340 was accrued PIK Note
interest expected to be paid in additional PIK Notes. The Company's current
liabilities also include (i) $325,000 of accrued directors fee as determined by
the Company's Board, (ii) $63,595 of a note payable related to the financing of
the Company's D&O and G/L policies, (iii) $119,269 of payables to a compounder
for which it has agreed to satisfy in halloysite product and (iv) $133,600 of
disputed or erroneously accrued expenses for which the Company believes it
will
eventually reverse.



Management believes that in order for the Company to meet its obligations
arising from normal business operations through August 14, 2020 that the Company
may be required (i) to raise additional capital either in the form of a private
placement of common stock or debt and/or (ii) generate additional sales of its
products that will generate sufficient operating profit and cash flows to fund
operations.  Without additional capital or additional sales of its products, the
Company's ability to continue to operate may be limited.



Based on the Company's current cash usage expectations, management believes it
may not have sufficient liquidity to fund its operations through August 14,
2020. Further, management cannot provide any assurance that it is probable that
the Company will be successful in accomplishing any of its plans to raise debt
or equity financing or generate additional product sales. Collectively these
factors raise substantial doubt regarding the Company's ability to continue as
going concern. These financial statements do not include any adjustments to the
recoverability and classification of recorded assets amounts and classification
of liabilities that might be necessary should the Company not be able to
continue as a going concern.



Cash used in operating activities during the six months ended June 30, 2019 was
$1,571,006 compared to $1,125,686 during the same period in 2018, an increase of
$445,320 or 39%. Cash used in operating activities during 2019 before adjusting
for changes in operating assets and liabilities was $1,909,007, $816,421 more
than the comparable period in 2018.



Cash provided by investing activities during the six months ended June 30, 2019 was $0 compared to $0 during the same period in 2018.

Cash used in financing activities during the six months ended June 30, 2019 was
$524,541 compared to $1,519,283 provided during the same period in 2018. The
$2,043,824 decrease in cash provided during the period was due primarily to no
proceeds from sale of common stock and exercise of options or warrants, and
$341,640 payment on PIK Notes.



Total assets at June 30, 2019 were $2,075,592 compared to $4,136,978 at December
31, 2018, a decrease of $2,061,368 due primarily to decrease in the Company cash
balance resulting from cash used in operations. Total liabilities were
$43,966,643 compared to $38,255,664 at December 31, 2018. The increase of
$5,710,979 in total liabilities was due primarily to the adoption of ASU
2016-02, Leases (Topic 842), which increased the operating lease liabilities and
the adoption of ASU 2017-11, which removed the derivative liabilities and
related debt discount.



ISSUANCE OF CONVERTIBLE DEBT


For information with respect to issuance of convertible debt, see Note 6 of Notes to Consolidated Financial Statements included elsewhere in this Quarterly Report.

Off-Balance Sheet Arrangements


There are no off-balance sheet arrangements between the Company and any other
entity that have, or are reasonable likely to have, a current or future effect
on our financial condition, changes in financial condition, revenues or
expenses, results of operations, liquidity, capital expenditures, or capital
resources that is material to investors.

© Edgar Online, source Glimpses

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Managers
NameTitle
Andre M. Zeitoun President, Chief Executive Officer & Director
Mario Concha Non-Executive Chairman
Christopher T. Carney Chief Financial Officer
Sharad Mathur Chief Technology Officer
John F. Levy Non-Executive Vice Chairman
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